Editing Shareholder rights plan (section)

==Overview==
In publicly held companies, there are various "poison pill" methods to deter [[takeover]] bids. Takeovers by [[proxy fight|soliciting proxies]] against the board or by acquiring a controlling block of shares and using the associated votes to get elected to the board.  Once in control of the board, the bidder can manage the target. Currently, the most common type of takeover defence is a shareholder rights plan. Because the [[board of directors]] of the company can redeem or otherwise eliminate a standard poison pill, it does not typically preclude a [[proxy fight]] or other takeover attempts not accompanied by an acquisition of a significant block of the company's stock.  It can, however, prevent shareholders from entering into certain agreements that can assist in a proxy fight, such as an agreement to pay another shareholder's expenses.  In combination with a [[staggered board of directors]], however, a shareholder rights plan can be a defense.<ref>See {{cite journal |last=Bebchuk |first=Lucian |author-link=Lucian Bebchuk |author2=Coates, John C. |author3=Subramanian, Guhan |year=2002 |title=The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy |journal=[[Stanford Law Review]] |volume=54 |issue=5 |pages=887–951 |jstor=1229689 |doi=10.2307/1229689 |publisher=Stanford Law Review |url=http://www.nber.org/papers/w8974.pdf |access-date=2019-08-29 |archive-date=2018-06-02 |archive-url=https://web.archive.org/web/20180602123928/http://www.nber.org/papers/w8974.pdf |url-status=live }}</ref>

The goal of a shareholder rights plan is to force a bidder to negotiate with the target's board and not directly with the shareholders. The effects are twofold:<ref>Fundamentals of Corporate Finance (6th ed.), Editions McGraw-Hill Ryerson, §23: Mergers and Acquisitions</ref>

* It gives management time to find competing offers that maximize the selling price.
* Several studies indicate that companies with poison pills (shareholder rights plans) have received higher takeover premiums than companies without poison pills. This results in increased shareholder value. The theory is that an increase in the negotiating power of the target is reflected in higher acquisition premiums.

===Common types of poison pills===
==== Preferred stock plan ====
The target issues a large number of new shares, often [[preferred stock|preferred shares]], to existing shareholders. These new shares usually have severe redemption provisions, such as allowing them to be converted into a large number of common shares if a takeover occurs. This immediately dilutes the percentage of the target owned by the acquirer and makes it more expensive to acquire 50% of the target's stock.

==== Flip-in ====
{{Main|Flip-in}}
A "flip-in" permits shareholders, except for the acquirer, to purchase additional shares at a discount. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.

==== Flip-over ====
{{Main|Flip-over}}
A "flip-over" enables stockholders to purchase the acquirer's shares after the merger at a discounted rate. For example, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.

==== Back-end rights plan ====
Under this scenario, the target company re-phases all its employees' stock-option grants to ensure they immediately become vested if the company is taken over. Many employees can then exercise their options and then dump the stocks. With the release of the "golden handcuffs", many discontented employees may quit immediately after having cashed in their stock options. This poison pill is designed to create an exodus of talented employees, reducing the corporate value as a target. In many high-tech businesses, attrition of talented human resources may result in a diluted or empty shell being left behind for the new owner.

For instance, [[PeopleSoft]] guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their PeopleSoft software licenses. While the acquisition ultimately prevailed, the hypothetical cost to Oracle was valued at as much as US$1.5 billion.<ref>{{Cite news |last=Leyden |first=John |date=2003-11-11 |title=Oracle chokes on PeopleSoft's poison pill |url=http://www.theregister.co.uk/2003/11/11/oracle_chokes_on_peoplesofts_poison/ |archive-url=https://web.archive.org/web/20171114074757/http://www.theregister.co.uk/2003/11/11/oracle_chokes_on_peoplesofts_poison/ |archive-date=2017-11-14 |work=[[The Register]]}}</ref>

==== Voting plan ====
{{Main|Voting plan}}
In a [[voting plan]], a company will charter preferred stock with superior voting rights over that of common shareholders. If an unfriendly bidder acquired a substantial quantity of the target firm's voting common stock, it then still would not be able to exercise control over its purchase. For example, [[ASARCO]] established a voting plan in which 99% of the company's common stock would only harness 16.5% of the total voting power.<ref>{{cite journal |last1=Malatesta |first1=Paul H. |last2=Walkling |first2=Ralph A. |title=Poison pill securities |journal=Journal of Financial Economics |date=January 1988 |volume=20 |pages=347–376 |doi=10.1016/0304-405X(88)90050-5 }}</ref>

In addition to these pills, a "dead-hand" provision allows only the directors who introduce the poison pill to remove it (for a set period after they have been replaced), thus potentially delaying a new board's decision to sell a company.

===Constraints and legal status===
The legality of poison pills had been unclear when they were first put to use in the early 1980s. However, the [[Delaware Supreme Court]] upheld poison pills as a valid instrument of takeover defense in its 1985 decision in ''[[Moran v. Household International, Inc.]]''  However, many jurisdictions other than the U.S. have held the poison pill strategy as illegal, or place restraints on their use.

==== Canada ====
In Canada, almost all shareholder's rights plans are "chewable," meaning they contain a permitted bid concept such that a bidder who is willing to conform to the requirements of a permitted bid can acquire the company by take-over bid without triggering a flip-in event.  Shareholder rights plans in Canada are also weakened by the ability of a hostile acquirer to petition the provincial securities regulators to have the company's pill overturned.  Generally, the courts will overturn the pill to allow shareholders to decide whether they want to tender to a bid for the company.  However, the company may be allowed to maintain it for long enough to run an auction to see if a [[white knight (business)|white knight]] can be found. A notable Canadian case before the securities regulators in 2006 involved the poison pill of [[Falconbridge Ltd.]] which at the time was the subject of a friendly bid from [[Vale Inco|Inco]] and a hostile bid from [[Xstrata]] plc, which was a 20% shareholder of Falconbridge.  Xstrata applied to have Falconbridge's pill invalidated, citing among other things that the Falconbridge had had its pill in place without shareholder approval for more than nine months and that the pill stood in the way of Falconbridge shareholders accepting Xstrata's all-cash offer for Falconbridge shares. Despite similar facts with previous cases in which securities regulators had promptly taken down pills, the [[Ontario Securities Commission]] ruled that Falconbridge's pill could remain in place for a further limited period as it had the effect of sustaining the auction for Falconbridge by preventing Xstrata increasing its ownership and potentially obtaining a blocking position that would prevent other bidders from obtaining 100% of the shares.

==== United Kingdom ====
In the United Kingdom, poison pills are not allowed under the [[Takeover Panel]] rules. The rights of public shareholders are protected by the Panel on a case-by-case, principles-based regulatory regime. Raids have helped bidders win targets such as [[BAA Limited|BAA]] plc and [[AWG plc]] when other bidders were considering emerging at higher prices. If these companies had poison pills, they could have prevented the raids by threatening to dilute the positions of their hostile suitors if they exceeded the statutory levels (often 10% of the outstanding shares) in the rights plan. The [[London Stock Exchange]] itself is another example of a company that has seen significant stakebuilding by a hostile suitor, in this case the [[NASDAQ]]. The LSE's ultimate fate is currently up in the air, but NASDAQ's stake is sufficiently large that it is essentially impossible for a third party bidder to make a successful offer to acquire the LSE.

==== Europe ====
Takeover law is still evolving in continental Europe, as individual countries slowly fall in line with requirements mandated by the [[European Commission]]. Stakebuilding is commonplace in many continental takeover battles such as [[Scania AB]]. Formal poison pills are quite rare in continental Europe, but national governments hold [[golden shares]] in many "strategic" companies such as telecom monopolies and energy companies. Governments have also served as "poison pills" by threatening potential suitors with negative regulatory developments if they pursue the takeover. Examples of this include Spain's adoption of new rules for the ownership of energy companies after [[E.ON]] of Germany made a hostile bid for [[Endesa (Spain)|Endesa]] and France's threats to punish any potential acquiror of [[Groupe Danone]].

===Other takeover defenses===
Poison pill is sometimes used more broadly to describe other types of takeover defenses that involve the target taking some action.  Although the broad category of takeover defenses (more commonly known as "shark repellents") includes the traditional shareholder rights plan poison pill.  Other anti-takeover protections include:

*Limitations on the ability to call special meetings or take action by written consent.
*Supermajority vote requirements to approve mergers.
*Supermajority vote requirements to remove directors.
*The target adds to its charter a provision which gives the current shareholders the right to sell their shares to the acquirer at an increased price (usually 100% above recent average share price), if the acquirer's share of the company reaches a critical limit (usually one third). This kind of poison pill cannot stop a determined acquirer, but ensures a high price for the company.
* The target takes on large [[debt]]s in an effort to make the debt load too high to be attractive—the acquirer would eventually have to pay the debts.
* The company buys a number of smaller companies using a [[stock swap]], diluting the value of the target's stock.
* Classified boards with staggered elections for the [[board of directors]]. For example, if a company had nine directors, then three directors would be up for re-election each year, with a three-year term. This would present a potential acquirer with the position of having a hostile board for at least a year after the first election. In some companies, certain percentages of the board (33%) may be enough to block key decisions (such as a full merger agreement or major asset sale), so an acquirer may not be able to close an acquisition for years after having purchased a majority of the target's stock. As of December 31, 2008, 47.05% of the companies in the S&P Super 1500 had a classified board.<ref>{{cite web|url=https://www.sharkrepellent.net/|title=SharkRepellent.net - Home|website=www.sharkrepellent.net|access-date=2019-07-05|archive-date=2019-09-08|archive-url=https://web.archive.org/web/20190908171040/https://sharkrepellent.net/|url-status=live}}</ref> As of March 31, 2020, 27.1% of the companies in the S&P Super 1500 had a classified board.<ref>{{cite web |url=http://www.dealpointdata.com/ |title=Merger Agreements, Corporate Governance, IPOs, High Yield Debt Covenants, Spin Offs |publisher=Deal Point Data |date= |accessdate=2022-11-27 |archive-date=2022-12-04 |archive-url=https://web.archive.org/web/20221204004920/https://www.dealpointdata.com/ |url-status=live }}</ref>

===Shareholder input===
A minuscule number of companies are giving shareholders a say on poison pills. As of June 15, 2009, 21 companies that had adopted or extended a poison pill had publicly disclosed they plan to put the poison pill to a shareholder vote within a year. That was up from 2008's full year total of 18, and was the largest number ever reported since the early 1980s, when the pill was invented.<ref>{{cite web|last=Laide|first=John|title=Shareholder Input on Poison Pills|url=https://www.sharkrepellent.net/request?an=dt.getPage&st=1&pg=/pub/rs_20090615.html&Shareholder_Input_on_Poison_Pills&rnd=674362|publisher=SharkRepellent.net|access-date=2009-06-24|archive-date=2011-07-24|archive-url=https://web.archive.org/web/20110724062512/https://www.sharkrepellent.net/request?an=dt.getPage&st=1&pg=/pub/rs_20090615.html&Shareholder_Input_on_Poison_Pills&rnd=674362|url-status=live}}</ref>